January 29, 2010

Cloud of uncertainty over securitisation

Regulators are also coming up with rules which would require banks to own parts of the deals, in an effort to discourage the securitisation of high-risk loans by forcing banks to keep some “skin in the game”. They say that by forcing banks to keep part of the loans they are seeking to sell on to other investors, banks will have greater incentives to make sure loans are sound.

Hanging over all this is the question about what will happen to the US housing market, as another round of losses could further dent values of existing mortgage-backed securities. Now, most US mortgages are being financed via Fannie Mae and Freddie Mac, the mortgage agencies taken over by the US government in 2008.

Whether or not mortgage rates will stay low once the Fed stops buying mortgage-backed debt in March is a big concern, as well as whether efforts to shape the future of Fannie Mae and Freddie Mac could have unexpected effects on investor confidence. Answers are not expected soon.